E205 | How to Become a Hidden Champion with Hermann Simon

Do you aspire for your company to become a Hidden Champion? 

Hidden champions are what businessman and bestselling author, Hermann Simon, describes as medium-sized, unknown companies with annual revenues under $5 billion that have quietly, under the radar, become world market leaders in their respective industries. 

Having previously written about hidden champions in his bestselling book, Hidden Champions, Hermann now explores China’s continued impact on the business world since its meteoric rise in the global business and economic sphere in recent years. 

While the main focus of Hermann’s research is on companies in German-speaking countries, because they comprise 56% of the world’s hidden champions, their success factors can be applied globally to any mid-sized companies as they strive to become global market leaders.

“The takeaway is to go really deep, find something you can really be the best in the world, that will drive your profit margin. It will drive a strategic moat around your business. You can be world famous in your niche.”

So, whether your company is a “Hidden Champion”, or aspires to be one, don’t miss Hermann on this week’s episode of Mind Your F**king Business. 

On today’s podcast:

• Hidden Champions
• The hidden champion culture
• Chinese hidden champions
• The problem with startups
• Mental globalisation

Links:

• Book – Hidden Champions in the Chinese Century
• Twitter – @HermannSimon
• LinkedIn – Hermann Simon
• Website – Hermann Simon

What it Takes to Become a Hidden Champion with Hermann Simon

Hermann Simon is Founder and Honorary Chairman of Simon-Kucher & Partners. Hermann is an expert in strategy, marketing and pricing. He is also the only German in the “Thinkers50 Hall of Fame.” 

Hermann is author of over 35 books on the subjects of profit and pricing, including Confessions of the Pricing Man and True Profit! No Company Ever Went Broke from Turning a Profit. He’s just published his latest book, Hidden Champions in the Chinese Century. 

In this episode of Mind Your F**king Business, Hermann discusses the notion of hidden champions, why Germany has so many of them, and what drives the entrepreneurial DNA in Germany to want to be the best in the world. Because it’s a strategic decision that German companies are making more often than their international competitors. Well, all except China. 

But first, what is a hidden champion?

Hidden Champions

In 1987, the famous Harvard Professor Ted Levitt, who made the term globalisation popular, asked Hermann: why are the Germans so successful in exports? Which got Hermann thinking – everybody thinks it’s large corporations which determine export performance, but he found that actually, Germany has a large number of mid-sized global market leaders, more so than any other country. 

And these champions are global market leaders, but nobody knows about them. And so he decided to call them Hidden Champions.

And these companies are specialised. Extremely specialised, highly focused, but global.

“I detected about 3,500 of these hidden champions. The definition is as follows. Top three in the world, less than €5 billion or dollars in revenue, and little known. Of the 3,500 in the world, about 1,500 come from Germany. And these 1,500 companies account for about 26% of the huge German exports.”

In fact, if you take all midsize exporters together, says Hermann, they account for about two thirds of all German exports. Something that is remarkably similar to China, where 68% of the Chinese exports come from mid-sized and small companies, and not from large firms. 

Finally, these companies aren’t all public companies, the majority of them are privately held family businesses. 

Why does Germany have so many midsize global companies?

It has to do with Germany’s history up until 1918, says Hermann. Because up until this point, Germany had 23 monarchies and three republics. And so entrepreneurs who wanted to grow and do business outside of their region essentially had to conduct international business. 

And so internationalisation, says Hermann, is in the German entrepreneurial DNA. 

So what stops these companies from being bought up or acquired?

Well, says Hermann, they are actually acquired and bought increasingly more and more by the Chinese. Because the Chinese are very fond of the hidden champions concept. 

The Chinese want to become global market leaders and so have been buying about 300 companies in the last seven years, many of them hidden champions. 

But it’s not just the Chinese who have been getting in on the action, Americans have also been buying up hidden champions, often through larger corporations or through private equity investors. 

The hidden champion culture

Family businesses often take a longer term, more paternalistic view of their employees, having a deep connection to where they’re from. And in many cases, these hidden champions are the largest employer in their town.

“70% of them are not in the big cities, but in small towns, even villages, and typically they are the largest employer in the region. And there are some interesting indicators of long term orientation and continuity.”

For instance, says Hermann, the average tenure of a hidden champion CEO is 21 years. For large corporations, it’s six years.

Another indicator is the loyalty of the employees. Average turnover or churn rate per year for hidden champions is 2.7%. The average for Germany is 7.3%. To put that into perspective, for McDonald’s it’s 100%, for Starbucks it’s 350%. Why is this? Because hidden champions tend to invest in the education of their employees, about 50% more than an average company. 

Plus, says Hermann, the ambition of a hidden champion leader is to be the best in their market worldwide. 

“The secret of superiority lies in this attitude that they go deeper in technology and know how, also in the value chain, because you can only be superior in something which you are doing yourself. If you buy it on the market, everybody else can buy it too.”

Take Faber Castell as an example. They’re the global leader in pencils. It’s a trivial product, and not a gross product in the age of digitalization. But they grow their own wood in Brazil because when the current CEO took over after his father died, he found out that relying on other people to grow wood doesn’t get the same consistent quality year after year. So he decided to grow their own wood and now they operate plantations – 100 square kilometres in Brazil, producing 2.3 billion pencils per year. And it’s this depth which leads to superiority and uniqueness in the end product.

The condition for this focus deep strategy that leads to growth is that you, as a company, globalise and do that through your own subsidiaries. You don’t delegate globalisation to distributors, agents, intermediaries. Doing that creates closeness to customers, says Hermann, and closeness to customers will be your biggest strength.

Chinese hidden champions

So what’s driving Chinese hidden champions? 

When it comes to the share of exports, says Hermann, China and Germany are very similar, with Chinese entrepreneurs eager to become global market leaders.

“When I give a speech in Europe on hidden champions, I ask, who of you strives to become hidden champion? Usually 10% raise their hand. When I ask the same question in China, usually to larger crowds, at least 50% raise their hand.”

To give a better understanding of how the Chinese are faring in their quest, Hermann shares the example of company-spend on research and development. The Germans already spent a lot –  50% more than the average company. But Chinese hidden champions, with comparable size and revenue have 3X more employees in research and development than the average company. 

Hermann’s advice to European or Western hidden champions is thus: you must become Chinese. You must perform every activity in the location where it can be performed best. And if that means relocating to China, that’s where you have to go. 

The problem with startups

While Germany has been in the vanguard with hidden champions, Hermann is sceptical that they’re generating enough now. 

“We have enough startups, but not enough scale ups, companies which grow from 10 employees to 1000 or 2000 employees in the next five or 10 years. And then there is a very serious problem with the startups. Many of them are sold, young startup entrepreneurs, they are offered $50-100 million and they take the money instead of building independent companies.”

And the ones that don’t sell are lured away overseas, out of Germany, to grow their company elsewhere. 

Mental globalisation

Finally, says Hermann, one of the key success factors for global hidden champions is this concept of mental globalisation or internationalisation of society. Which starts with families going abroad for vacation. 

In Germany for example, it’s common to go away for holiday. To go travelling, to venture overseas. In France on the other hand, it’s not. Nor is it common in Japan or Korea, or even for the United States.

But among the large countries, says Hermann, Germany is by far the most internationalised. Even the UK is lagging behind in this mental development, in comparison.

“The fire, the combustion, that drive comes from the entrepreneurs with the ambition to be the best in the world. And if you have set ambition, it’s amazing what you can achieve.”

Book recommendations

John Steinbeck – Travels With Charley

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